The Hibernating Economy: State of Play Briefing (April 1, 2020)
June Ma, Rohan Pitchford, Rabee Tourky
This is a regular post in which we look at the state of play during the period of economic hibernations. In this post we will summarise the impact of fixed ongoing payments on various parts of the economies. These are commitments formed prior to the lockdowns to ongoing payments.
Impact of fixed ongoing payments
Businesses in most industries will have fixed ongoing costs for rent, utilities, government rates and charges, wages, superannuation, insurance, supply contracts, and any business loans they may hold. These payments are generally unavoidable, but some businesses may no longer be able to meet their payments due to the coronavirus-induced downturn. Without incoming revenue or substantial savings, it is unlikely that these businesses would be able to meet their ongoing payment obligations for the duration of the crisis, which would affect their ability to come out of hibernation.
Most businesses will be able to reduce their ongoing labour-related costs by standing down employees, particularly in industries where casual employees account for a large proportion of the workforce. They may also be able to reduce payments made for the supply of goods, depending on how their contracts are structured. In addition, the government will protect tenants from eviction for non-payment of rent during the crisis, though it does not appear that payment obligations will be waived. Furthermore, the banking sector has put together a small business rescue package that will enable affected businesses to defer loan repayments for up to six months. Outside of these measures, businesses will likely need to approach providers to renegotiate the terms of their payments, unless contracts are nearing the end of their terms.
The hospitality industry has been directly affected by the government’s forced shutdown of dining venues. While some businesses have adapted to offer takeaway and delivery options, many have reported a substantial decline in turnover since the beginning of the crisis, leading some businesses to close indefinitely. Many hospitality businesses will be able to quickly reduce their wage and superannuation costs as casuals account for 79 per cent of the hospitality workforce, and potentially their supply contracts. Other ongoing payments are likely to require negotiation with providers.
Gyms and indoor sporting venues
Gyms and indoor sporting venues have been forced by the government to close during the crisis. Some gyms have adapted to livestream classes online or rent equipment to members, though this is unlikely to require the same level of staffing to operate in normal times, and will likely result in a reduction in hours for casual employees as well as the standing down of some full-time and part-time staff. Other ongoing expenses are likely to be unchanged.
While the retail industry is yet to be directly affected by the government’s shutdown, many retailers have decided to close, as social distancing restrictions and employee layoffs throughout the economy reduce foot traffic in stores. Many retailers have existing online stores on which they can continue trading, and some without existing e-commerce platforms have sought to move online. Similar to hospitality, retail businesses will be able to quickly reduce wage and superannuation costs by standing down casual employees, though to a lesser extent (casuals account for 36 per cent of the retail workforce). Some larger retailers have also indicated that they will not be paying rent for the duration of the crisis, though the consequences of this are unclear. Other ongoing expenses are likely to be unchanged.
The impact of the coronavirus outbreak has varied across businesses in the manufacturing industry. Increased demand for personal protective equipment (PPE), hand sanitisers, cleaning agents, and certain non perishable food items has resulted in supply shortages, and has resulted in some businesses hiring to increase production. Some businesses with equipment that can be repurposed to make these items have adapted in response to this demand. For example, some distilleries are now also producing hand sanitiser and clothing manufacturers are making PPE. By contrast, manufacturers in other sectors such as heavy machinery have been affected by supply chain disruptions and reduced demand as a result of the earlier shutdowns in China, where a record number of force majeure certificates have been issued. This has relieved parties of their obligations under existing contracts, and it is possible that this could also occur in the manufacturing industry in Australia.
The government has required cinemas to close during the crisis, while many theatres and galleries have closed as a precautionary measure or due to restrictions imposed by social distancing requirements. Many of these businesses have adapted to digitise their experiences — for example, some are live streaming performances, while others are providing access to their digital collections. While digitisation enables these businesses to continue entertaining customers during the shutdown, it also requires less labour, which has resulted in the standing down of some employees. Where venues have not been mandated to shutdown, contracts with artists to display or perform their work will likely have to be renegotiated, rather than relying on force majeure clauses. Other ongoing expenses are likely to be unchanged.
Hotels and airlines
Hotels and airlines have been directly affected by the travel restrictions imposed by the government, which has meant that inbound tourist numbers are minimal. Unlike other industries, hotels generally do not have rental costs, but otherwise incur similar ongoing costs. Both hotels and airlines have been widely reported to have stood down employees in response to the crisis, though hotels now being used to quarantine returning residents are likely to have been affected to a lesser extent. The decline in customers means that the supply contracts for hotels and airlines would need to be reduced substantially, while all other expenses are likely to be unchanged. The federal government has already committed over $1 billion to support the aviation industry.
Many households will have unavoidable fixed ongoing costs for mortgages/rent, utilities, and government rates. The government will prevent tenants from being evicted if they fail to pay their rent during the crisis, while mortgagors may be able to access financial assistance from their banks to defer repayments or alter their loan structure. Similarly, many utility providers have announced that they will not disconnect customers in financial stress during the crisis, in addition to other measures such as the waiver of late payment fees. Some local councils are also waiving rates during the crisis. The impact of the outbreak will differ depending on the structure of a household, and will have smaller effect on those who own their homes outright.
Single and Dual income
Whether the ability of single and dual income households to meet their ongoing payments is affected by the crisis will depend on a number of factors including whether they own their home outright, own an investment property, and a source of income has been lost. Households owning their home outright will be affected to a lesser extent even where a source of income has been lost. The loss of an income stream in a dual income household is likely to have a smaller impact than on a single income household, as it may be possible that the remaining source of income is sufficient to meet fixed payment obligations. Households with mortgages on both their home and investment property have the greatest potential to be adversely affected by the virus if all sources of income are lost.
The ability of retirees partly relying on rental income in making their own ongoing payment obligations may be affected if their tenants are unable to pay rent. This will be less problematic where the investment property has been paid off, but could put these households into financial stress where there is still a mortgage over the property. Households falling into the latter category would need to apply for financial assistance from their bank for temporary relief or to renegotiate their debt contract, and potentially from their utility providers.
The ability of households comprised of pensioners without other regular sources of income to make their fixed ongoing payments should not be affected by the crisis, and will also receive a one-off stimulus payment of $750.